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HUL: Extraordinary saves the day - Views on News from Equitymaster

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HUL: Extraordinary saves the day
Oct 24, 2008

Performance summary
  • Topline for both the period under consideration grows by 20% YoY.
  • EBITDA margins decline by more than 1% on account of higher raw material costs
  • Excluding the extraordinary items, bottomline grows by 7% YoY and 14% YoY respectively for the quarter and half year ended September 2008.


Financial view
(Rs m) 3QCY07 3QCY08 % change 9mCY07 9mCY08 % change
Net sales 33,646 40,279 19.7% 100,304 120,375 20.0%
Expenditure 29,150 35,516 21.8% 87,149 106,019 21.7%
Operating profit (EBDITA) 4,497 4,763 5.9% 13,155 14,356 9.1%
EBDITA margin (%) 13.4% 11.8%   13.1% 11.9%  
Other income 305 830 171.9% 917 2,442 166.5%
Interest (665) (409) -38.5% (1,703) (1,330) -21.9%
Depreciation 353 393 11.3% 1,015 1,135 11.8%
Profit before tax 5,114 5,610 9.7% 14,759 16,994 15.1%
Extraordinary item (17) 1,087   1,083 1,293  
Tax 1017 1231 21.1% 2,902 3,430 18.2%
Profit after tax/(loss) 4,081 5,466 34.0% 12,940 14,857 14.8%
Net profit margin (%) 12.1% 13.6% 12.9% 12.3%  
No. of shares (m) 2207.0 2179.2 2207.0 2179.2  
Diluted earnings per share (Rs)*         9.72  
Price to earnings ratio (x)*     24.0  
* On a 12-month trailing basis

What has driven performance in 3QCY08?
  • The topline for both the period under consideration grew by 20% YoY. FMCG sales grew by 21.6% YoY with a 22.5% YoY growth in HPC and 17.5% YoY growth in foods businesses. All the key categories witnessed strong performance in terms of sales. Laundry category continued robust growth across all its brands. Personal wash, shampoo and skin category too witnessed robust sales. Strong performance across its beverages, processed foods and ice creams segment aided the growth. Due to a secular shift in consumption habits the company is witnessing strong growth. Its rural and urban presence along with wide offerings makes it a strong play.

  • HUL witnessed a 1% decline in operating margins for both the period under consideration. Higher raw materials and other expenses as a percent of sales led to the decline. Input cost inflation, especially crude based, peaked during the quarter. Aggressive cost savings program and pricing actions helped to offset some of the impact. The margins are lower than our full year estimates (CY08 13%).

  • On the PBIT front, exports witnessed strong growth of 8.7% during the quarter. Except soap and detergent segment, all categories witnessed marginal improvement. The soaps and detergents segment suffered the maximum cost escalation.

  • Excluding the extraordinary items, (structuring costs and profit on sale of properties) the bottomline in 3QCY08 has grown by 7% YoY, while that of 9mCY08 has reported a 14.4% growth. Higher other income on account of forex gains aided the jump. Even the tax rate for the quarter has increased to 22% from 20%.

    All round picture..
      % contribution to sales Revenue growth PBIT growth PBIT margin (%) PBIT margin (decline)/gain (basis points)
    Soaps and Detergents 48.6% 26.0% 4.5% 13.5% -270
    Personal Products 25.7% 18.0% 20.8% 24.3% 57
    Beverages 10.8% 12.9% 13.6% 14.1% 9
    Foods (includes Oils and Fats, Culinary and Branded Staples ) 4.3% 34.5% 50.9% 1.5% 16
    Ice Creams 1.1% 25.3% 371.1% 4.5% 334
    Exports 7.3% -5.9% 407.7% 10.7% 872
    Others (includes Chemicals, Agri, Plantations etc) 2.2% 64.2% 23.0% -31.8% 1,065

What to expect?
At the current price of Rs 233, the stock is trading at 20.1 times our CY10 estimates. The company continues to benefit from strong demand on account of its wide offerings. Strong volumes coupled with price hikes have enabled the company to beat our CY08 estimates. It however, continues to face margin pressure, which may ease off going forward with the cooling off of commodity prices. We continue to remain positive about the growth prospects of the company in the domestic markets and are enthused by its restructuring activities and foray into the foods and water businesses. However at the current juncture, the risk reward ratio of HUL is unfavorable, especially against the backdrop of vastly reduced valuations of its peers.

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